ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2010

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ____________ to ___________

Commission File Number 0-4776

STURM, RUGER & COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

06-0633559

(I.R.S. Employer

Identification No.)

Lacey Place, Southport, Connecticut

(Address of Principal Executive Offices)

06890

(Zip Code)

(203) 259-7843

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Common Stock, $1 par value

Name of Each Exchange on Which Registered

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO ü

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO ü

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ü NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ü ].

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ü ] Non-accelerated filer [] Smaller reporting company [ ].

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO ü

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2010:

Common Stock, $1 par value - $270,565,000

The number of shares outstanding of the registrant’s common stock as of February 18, 2011:

Common Stock, $1 par value - 18,703,900 shares

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the registrant’s Proxy Statement relating to the 2011 Annual Meeting of Stockholders to be held April 26, 2011 are incorporated by reference into Part III (Items 10 through 14) of this Report.

In this Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. (the “Company”) makes forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of the Company’s total sales for the year ended December 31, 2010 were from the firearms segment, and approximately 1% was from investment castings. Export sales represent less than 6% of firearms sales. The Company’s design and manufacturing operations are located in the United States and most product content is domestic.

The Company has been in business since 1949 and was incorporated in its present form under the laws of Delaware in 1969. The Company offers products in four industry product categories – rifles, shotguns, pistols, and revolvers. The Company’s firearms are sold through independent wholesale distributors, principally to the commercial sporting market.

The Company manufactures and sells investment castings made from steel alloys for both outside customers and internal use in the firearms segment. Investment castings sold to outside customers, either directly to or through manufacturers’ representatives, represented approximately 1% of the Company’s total sales for the year ended December 31, 2010.

For the years ended December 31, 2010, 2009, and 2008, net sales attributable to the Company’s firearms operations were approximately $251.7 million, $266.6 million and $174.4 million or approximately 99%, 98%, and 96%, respectively, of total net sales. The balance of the Company’s net sales for the aforementioned periods was attributable to its investment castings operations.

Firearms Products

The Company presently manufactures firearm products, under the “Ruger” name and trademark, in the following industry categories:

Rifles

Shotguns

●

Single-shot

●

Over and Under

●

Autoloading

●

Bolt-action

●

Modern sporting

Pistols

Revolvers

●

Rimfire autoloading

●

Single-action

●

Centerfire autoloading

●

Double-action

Most firearms are available in several models based upon caliber, finish, barrel length, and other features.

Rifles

A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a stabilizing spin after it leaves the barrel. Sales of rifles by the Company accounted for approximately $63.5 million, $102.2 million, and $69.4 million, of revenues for the years 2010, 2009 and 2008, respectively.

4

Shotguns

A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. Sales of shotguns by the Company accounted for approximately $1.4 million, $1.2 million, and $1.5 million of revenues for the years 2010, 2009 and 2008, respectively.

Pistols

A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which typically is fed ammunition from a magazine contained in the grip. Sales of pistols by the Company accounted for approximately $108.1 million, $87.5 million, and $52.5 million of revenues for the years 2010, 2009 and 2008, respectively.

Revolvers

A revolver is a handgun that has a cylinder that holds the ammunition in a series of chambers which are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers, single-action and double-action. To fire a single-action revolver, the hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the hammer. Sales of revolvers by the Company accounted for approximately $67.1 million, $58.3 million, and $41.0 million of revenues for the years 2010, 2009, and 2008, respectively.

Accessories

The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for approximately $11.5 million, $17.4 million, and $9.9 million of revenues for the years 2010, 2009 and 2008, respectively.

Investment Casting Products

Net sales attributable to the Company’s investment casting operations (excluding intercompany transactions) accounted for approximately $3.5 million, $4.4 million, and $7.1 million, or approximately 1%, 2%, and 4% of the Company’s total net sales for 2010, 2009, and 2008, respectively.

Manufacturing

Firearms

The Company produces one model of pistol and all of its rifles, shotguns, and revolvers at the Newport, New Hampshire facility. All other pistols are produced at the Prescott, Arizona facility.

Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company’s castings facility through a process known as precision investment casting. See “Manufacturing-Investment Castings” for a description of the investment casting process. The Company initiated the use of this process in the production of component parts for firearms in 1953. The Company believes that the investment casting process provides greater design flexibility and results in component parts which are generally close to their ultimate shape and, therefore, require less machining than processes requiring machining a solid billet of metal to obtain a part. Through the use of investment castings, the Company endeavors to produce durable and less costly component parts for its firearms.

5

All assembly, inspection, and testing of firearms manufactured by the Company are performed at the Company’s manufacturing facilities. Every firearm, including every chamber of every revolver manufactured by the Company, is test-fired prior to shipment.

Investment Castings

To produce a product by the investment casting method, a wax model of the part is created and coated (“invested”) with several layers of ceramic material. The shell is then heated to melt the interior wax which is poured off, leaving a hollow mold. To cast the desired part, molten metal is poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a near net shape cast metal part.

Marketing and Distribution

Firearms

The Company’s firearms are primarily marketed through a network of selected Federally licensed, independent wholesale distributors who purchase the products directly from the Company. They resell to Federally licensed retail firearms dealers who in turn resell to legally authorized end users. All retail purchasers are subject to a point-of-sale background check by law enforcement. These end users include sportsmen, hunters, people interested in self-defense, law enforcement and other governmental organizations, and gun collectors. Each distributor carries the entire line of firearms manufactured by the Company for the commercial market. Currently, 14 distributors service the domestic commercial market, with an additional 21 distributors servicing the domestic law enforcement market and two distributors servicing the Canadian market.

In 2010, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-12%; Lipsey’s-11% and Sports South-11%. In 2009, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-11%; Lipsey’s-11%; Sports South-11% and Big Rock-10%. In 2008, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-17%; Lipsey’s-12%; Sports South-11% and Davidson’s-10%.

The Company employs eight employees and one independent contractor who service these distributors and call on retailers and law enforcement agencies. Because the ultimate demand for the Company’s firearms comes from end users rather than from the independent wholesale distributors, the Company believes that the loss of any distributor would not have a material, long-term adverse effect on the Company, but may have a material impact on the Company’s financial results for a particular period. The Company considers its relationships with its distributors to be satisfactory.

The Company also exports its firearms through a network of selected commercial distributors and directly to certain foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were less than 6% of the Company’s consolidated net sales for each of the past three fiscal years.

As of February 1, 2011, the order backlog was approximately $59 million. As of February 1, 2010, order backlog was approximately $70 million.

The Company does not consider its overall firearms business to be predictably seasonal; however, orders of many models of firearms from the distributors tend to be stronger in the first quarter of the year and

6

weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

Investment Castings

The investment casting segment’s principal markets are commercial, sporting goods, and military. The Company produces various products for a number of customers in a variety of industries, including approximately 20 firearms and firearms component manufacturers. The investment castings segment provides castings for the Company’s firearms segment.

Competition

Firearms

Competition in the firearms industry is intense and comes from both foreign and domestic manufacturers. While some of these competitors concentrate on a single industry product category such as rifles or pistols, several competitors manufacture products in the same four industry categories as the Company (rifles, shotguns, pistols, and revolvers). Some of these competitors are subsidiaries of larger corporations than the Company with substantially greater financial resources than the Company, which could affect the Company’s ability to compete. The principal methods of competition in the industry are product innovation, quality, availability, and price. The Company believes that it can compete effectively with all of its present competitors.

Investment Castings

There are a large number of investment castings manufacturers, both domestic and foreign, with which the Company competes. Competition varies based on the type of investment castings products and the end use of the product (commercial, sporting goods, or military). Companies offering alternative methods of manufacturing such as metal injection molding (MIM), wire electric discharge machining (EDM) and advancements in computer numeric controlled (CNC) machining also compete with us to provide our customers with products. Many of these competitors are larger corporations than the Company with substantially greater financial resources than the Company, which could affect the Company’s ability to compete with these competitors. The principal methods of competition in the industry are quality, price, and production lead time. The Company believes that it can compete effectively with its present domestic competitors. However, it is unknown if the Company can compete with foreign competitors in the long term.

Employees

As of February 1, 2011, the Company employed approximately 1,160 full-time employees of which approximately 53% had at least ten years of service with the Company. The Company uses temporary employees to supplement its workforce.

None of the Company’s employees are subject to a collective bargaining agreement.

Research and Development

In 2010, 2009, and 2008, the Company spent approximately $3.2 million, $2.0 million, and $1.5 million, respectively, on research activities relating to the development of new products and the improvement of existing products. As of February 1, 2011, the Company had approximately 27 employees whose primary responsibilities were research and development activities.

7

Patents and Trademarks

The Company owns various United States and foreign patents and trademarks which have been secured over a period of years and which expire at various times. It is the policy of the Company to apply for patents and trademarks whenever new products or processes deemed commercially valuable are developed or marketed by the Company. However, none of these patents and trademarks are considered to be fundamental to any important product or manufacturing process of the Company and, although the Company deems its patents and trademarks to be of value, it does not consider its business materially dependent on patent or trademark protection.

Environmental Matters

The Company is committed to achieving high standards of environmental quality and product safety, and strives to provide a safe and healthy workplace for its employees and others in the communities in which it operates. The Company has programs in place that monitor compliance with various environmental regulations. However, in the normal course of its manufacturing operations the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. These regulations are integrated into the Company’s manufacturing, assembly, and testing processes. The Company believes that it is generally in compliance with applicable environmental regulations and the outcome of any environmental proceedings and orders will not have a material effect on the financial position of the Company, but could have a material impact on the financial results for a particular period.

Executive Officers of the Company

Set forth below are the names, ages, and positions of the executive officers of the Company. Officers serve at the discretion of the Board of Directors of the Company.

Name

Age

Position With Company

Michael O. Fifer

53

President and Chief Executive Officer

Thomas A. Dineen

42

Vice President, Treasurer and Chief Financial Officer

Christopher J. Killoy

52

Vice President of Sales and Marketing

Mark T. Lang

54

Group Vice President

Thomas P. Sullivan

50

Vice President of Newport Operations

Kevin B. Reid, Sr.

50

Vice President and General Counsel

Stephen M. Maynard

56

Vice President of Lean Business Development

Leslie M. Gasper

57

Corporate Secretary

Michael O. Fifer joined the Company as Chief Executive Officer on September 25, 2006, was named to the Board of Directors on October 19, 2006, and was named President on April 23, 2008. Prior to

8

joining the Company, Mr. Fifer was President of the Engineered Products Division of Mueller Industries, Inc. Prior to joining Mueller Industries, Inc., Mr. Fifer was President, North American Operations, Watts Water Technologies.

Thomas A. Dineen became Vice President on May 24, 2006. Previously he served as Treasurer and Chief Financial Officer since May 6, 2003 and had been Assistant Controller since 2001. Prior to that, Mr. Dineen had served as Manager, Corporate Accounting since 1997.

Christopher J. Killoy rejoined the Company as Vice President of Sales and Marketing on November 27, 2006. Mr. Killoy originally joined the Company in 2003 as Executive Director of Sales and Marketing, and subsequently served as Vice President of Sales and Marketing from November 1, 2004 to January 25, 2005.

Mark T. Lang joined the Company as Group Vice President on February 18, 2008. Mr. Lang is responsible for management of the Prescott Firearms Division and the Company’s acquisition efforts. Prior to joining the Company, Mr. Lang was President of the Custom Products Business at Mueller Industries, Inc. Prior to joining Mueller, Mr. Lang was the Vice President of Operations for the Automotive Division of Thomas and Betts, Inc.

Thomas P. Sullivan joined the Company as Vice President of Newport Operations for the Newport, New Hampshire Firearms and Pine Tree Castings divisions on August 14, 2006. Prior to joining the Company, Mr. Sullivan was Vice President of Lean Enterprises at IMI Norgren Ltd.

Kevin B. Reid, Sr. was elected by the Board as Vice President and General Counsel on April 23, 2008. Prior thereto, Mr. Reid served as the Company’s Director of Marketing from June 4, 2007. Mr. Reid joined the Company in July 2001 as an Assistant General Counsel.

Steven M. Maynard joined the Company as Vice President of Lean Business Development on April 24, 2007. Prior to joining the Company, Mr. Maynard served as Vice President of Engineering and CIO at the Wiremold Company.

Leslie M. Gasper has been Secretary of the Company since 1994. Prior to this, Ms. Gasper was the Administrator of the Company’s pension plans, a position she held for more than five years prior thereto.

Where You Can Find More Information

The Company is a reporting company and is therefore subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and accordingly files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K, and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information on the Public Reference Room. As an electronic filer, the Company’s public filings are maintained on the SEC’s Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.

9

The Company files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act accessible free of charge through the Company’s Internet site after the Company has electronically filed such material with, or furnished it to, the SEC. The address of that website is http://www.ruger.com. However, such reports may not be accessible through the Company’s website as promptly as they are accessible on the SEC’s website.

Additionally, the Company’s corporate governance materials, including its Corporate Governance Guidelines, the charters of the Audit, Compensation, and Nominating and Corporate Governance committees, and the Code of Business Conduct and Ethics may also be found under the “Stockholder Relations” section of the Company’s Internet site at www.ruger.com. A copy of the foregoing corporate governance materials is available upon written request to the Corporate Secretary at Sturm, Ruger & Company, Inc., Lacey Place, Southport, Connecticut 06890.

The Company’s operations could be affected by various risks, many of which are beyond its control. Based on current information, the Company believes that the following identifies the most significant risk factors that could affect its business. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

In evaluating the Company’s business, the following risk factors, as well as other information in this report, should be carefully considered.

Changes in government policies and firearms legislation could adversely affect the Company’s financial results.

The sale, purchase, ownership, and use of firearms are subject to thousands of federal, state and local governmental regulations. The basic federal laws are the National Firearms Act, the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the private ownership of fully automatic weapons and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company does not manufacture fully automatic weapons, other than for the law enforcement market, and holds all necessary licenses under these federal laws. From time to time, congressional committees review proposed bills relating to the regulation of firearms. These proposed bills generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Several states currently have laws in effect similar to the aforementioned legislation.

Until November 30, 1998, the “Brady Law” mandated a nationwide five-day waiting period and background check prior to the purchase of a handgun. As of November 30, 1998, the National Instant Check System, which applies to both handguns and long guns, replaced the five-day waiting period. The Company believes that the “Brady Law” and the National Instant Check System have not had a significant effect on the Company’s sales of firearms, nor does it anticipate any impact on sales in the future. On September 13, 1994, the “Violent Crime Control and Law Enforcement Act” banned so-called “assault weapons.” All the Company’s then-manufactured commercially-sold long guns were exempted by name as “legitimate sporting firearms.” This ban expired by operation of law on September 13, 2004. The Company remains strongly opposed to laws which would restrict the rights of law-abiding citizens to lawfully acquire firearms. The Company believes that the lawful private ownership of firearms is guaranteed by the Second Amendment to the United States Constitution and

10

that the widespread private ownership of firearms in the United States will continue. However, there can be no assurance that the regulation of firearms will not become more restrictive in the future and that any such restriction would not have a material adverse effect on the business of the Company.

The Company’s results of operations could be adversely affected by litigation.

The Company faces risks arising from various asserted and unasserted litigation matters. These matters include, but are not limited to, assertions of allegedly defective product design or manufacture, purported class actions against firearms manufacturers, generally seeking relief such as medical expense reimbursement, property damages and punitive damages arising from accidents involving firearms or the criminal misuse of firearms, and those lawsuits filed on behalf of municipalities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as final adverse judgment, significant settlement or changes in applicable law. A future adverse outcome in any one or more of these matters could have a material adverse effect on the Company’s financial results. See Note 17 to the financial statements which are included in this Form 10-K.

The Company must comply with various laws and regulations pertaining to workplace safety, environmental matters, and firearms manufacture.

In the normal course of its manufacturing operations, the Company is subject to numerous federal, state and local laws and governmental regulations and related state laws, and occasional governmental proceedings and orders. These laws and regulations pertain to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. Noncompliance with any one or more of these laws and regulations could have a material adverse impact on the Company.

Business disruptions at one of the Company’s manufacturing facilities could adversely affect the Company’s financial results.

The Newport, New Hampshire and Prescott, Arizona facilities are critical to the Company’s success. These facilities house the Company’s principal production, research, development, engineering, design, and shipping operations. Any event that causes a disruption of the operation of either of these facilities for even a relatively short period of time might have a material adverse affect on the Company’s ability to produce and ship products and to provide service to its customers.

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle and shotgun stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide ample time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials can not be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

The healthcare legislation passed in 2010 could have a material adverse impact on the Company.

Certain provisions of the recently passed federal healthcare legislation, in particular the “unlimited lifetime benefit” which eliminated the practice of capping the amount of medical benefits available to an individual, could adversely affect the Company’s financial position. The Company self insures the cost of the medical benefits for its employees up to an annual and lifetime maximum per individual. It

11

supplements this self-insurance with ”stop loss” insurance for costs incurred above these maximum thresholds. In the past, the medical benefit costs for several employees of the Company have exceeded this maximum each year, in some cases significantly. It is the Company’s expectation that if it is forced to provide an “unlimited lifetime benefit” its medical costs would likely increase significantly which would adversely affect its financial condition.

The Company’s manufacturing operations are carried out at two facilities. The following table sets forth certain information regarding each of these facilities:

Approximate

Aggregate Usable

Square Feet

Status

Segment

Newport, New Hampshire

350,000

Owned

Firearms/Castings

Prescott, Arizona

230,000

Leased

Firearms

Each facility contains enclosed ranges for testing firearms and also contains modern tool room facilities. The lease of the Prescott facility provides for rental payments, which are approximately equivalent to estimated rates for real property taxes.

The Company has four other facilities that were not used in its manufacturing operations in 2010:

Approximate

Aggregate Usable

Square Feet

Status

Segment

Southport, Connecticut
(Station Street property)

5,000

Owned

Not Utilized

Southport, Connecticut

(Lacey Place property)

25,000

Owned

Corporate

Newport, New Hampshire

(Dorr Woolen Building)

45,000

Owned

Firearms

Enfield, Connecticut

10,000

Leased

Firearms

There are no mortgages or any other major encumbrance on any of the real estate owned by the Company.

The Company’s principal executive offices are located in Southport, Connecticut. The Company believes that its existing facilities are suitable and adequate for its present purposes.

The nature of the legal proceedings against the Company is discussed at Note 17 to the financial statements, which are included in this Form 10-K.

The Company has reported all cases instituted against it through October 2, 2010, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.

During the three months ending December 31, 2010, no cases were formally instituted against the Company nor were any previously reported cases settled.

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

Equity compensation plans approved by security holders

1998 Stock Incentive Plan

350,000

$8.10 per share

-

2001 Stock Option Plan for Non-Employee Directors

80,000

$7.33 per share

-

2007 Stock Incentive Plan

919,307

$10.08 per share

1,535,000

Equity compensation plans not approved by security holders

None.

Total

1,349,307

$9.30 per share

1,535,000

*

Restricted stock units are settled in shares of the Company’s common stock on a one-for-one basis. Accordingly, such units have been excluded for purposes of computing the weighted-average exercise price.

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of the Company’s total sales for 2010 were firearms sales, and 1% was investment castings sales. Export sales represent less than 6% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

The Company also manufactures investment castings made from steel alloys for internal use in its firearms and utilizes excess investment casting capacity to manufacture and sell castings to unaffiliated, third-party customers.

Because most of the Company’s competitors are not subject to public filing requirements and industry-wide data is generally not available in a timely manner, the Company is unable to compare its performance to other companies or specific current industry trends. Instead, the Company measures itself against its own historical results.

The Company does not consider its overall firearms business to be predictably seasonal; however, orders of many models of firearms from the distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

Results of Operations - 2010

Product Demand

The estimated sell-through of the Company’s products from distributors to retailers in 2010 increased 2% from 2009. During this period, National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation) decreased 1%.

We believe the year-over-year increase in estimated sell-through from distributors to retailers from 2009 is likely due to the following factors:

●

Increased demand for handguns,

●

The Company’s commitment to new product development which yielded several new product launches in 2010 which generated continued demand, and

Estimated sell-through from distributors to retailers and total NICS background checks follow:

2010

2009

2008

Estimated Units Sold from Distributors to Retailers (1)

901,500

887,400

631,000

Total Adjusted NICS Background Checks (thousands) (2)

9,400

9,500

9,000

(1)

The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:

●

Rely on data provided by independent distributors that are not verified by the Company,

●

Do not consider potential timing issues within the distribution channel, including goods-in-transit, and

●

Do not consider fluctuations in inventory at retail.

(2)

The adjusted NICS data presented above was derived by the National Shooting Sports Foundation (“NSSF”) by subtracting out NICS purpose code permit checks used by several states such as Kentucky and Utah for concealed carry (CCW) permit application checks as well as checks on active CCW permit databases. While not a direct correlation to firearms sales, the NSSF adjusted NICS data provides a more accurate picture of current market conditions.

While NICS background checks are not a precise measure of retail activity, they are commonly used as a proxy for retail demand. NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

The Company launched the SR9c compact pistol, the LCR357 revolver, and the SR40 striker-fired pistol in 2010. New product introductions, including the aforementioned products, remain a strong driver of demand and represented $62.3 million or 24.8% of sales in 2010.

Orders Received and Ending Backlog

(in millions except average sales price, net of Federal Excise Tax):

2010

2009

2008

Orders Received

$

229.4

$

269.5

$

212.5

Average Sales Price of Orders Received (3)

$

272

$

281

$

274

Ending Backlog

$

34.9

$

59.6

$

47.8

Average Sales Price of Ending Backlog (3)

$

326

$

330

$

269

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(3)

Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

The decrease in orders received and the ending backlog in 2010 is due to the strong retail demand that began in late 2008 and resulted in large orders from distributors in 2009. The backlog was higher than normal for most of 2009.

The average sales price of orders received and ending backlog in 2010 decreased from 2009 due to significant orders in 2009 for certain higher-priced rifles, including the SR-556.

Production

After three years of increased production, the Company intentionally reduced its output in 2010 by 3% compared to 2009 while closely monitoring its finished goods inventory growth and distributor sell-through to retailers. Production of certain products was limited to rates moderately in excess of estimated retail demand for those products, to allow for only modest increased finished goods inventory levels for those products. The Company anticipates continuing to temper production of certain products in 2011 to avoid building finished goods inventory levels throughout the distribution channel too quickly.

The Company continues to further implement lean manufacturing principles across its facilities. This ongoing process began in 2006, and includes initiatives such as the following:

●

transitioning from batch production to single-piece flow manufacturing,

Finished goods unit inventory levels for the Company and distributors increased very slightly in 2010,and remain below optimal levels to support rapid order fulfillment.

20

The Company anticipates that its finished goods inventory could increase by as much as $12 million to $15 million from the current level upon the attainment of the desired levels of finished goods inventory. The Company hopes to build toward this finished goods inventory level slowly to mitigate the likelihood and magnitude of any production disruptions that could be caused by sudden and significant demand reductions.

As our independent distributors continually attempt to increase their inventory turns without unduly hindering their ability to fulfill retail demand, distributor inventories of the Company’s products may increase at a slower rate than desired, or not at all. Distributor investments in other manufacturers’ products, some of which may not be turning as fast as the Company’s products turn, may further impede this inventory replenishment.

Inventory data follows:

December 31,

2010

2009

2008

Units – Company Inventory

23,600

20,100

12,400

Units – Distributor Inventory (4)

97,700

96,200

57,500

Total inventory (5)

121,300

116,300

69,900

(4)

Distributor ending inventory as provided by the independent distributors of the Company’s products. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

(5)

This total does not include inventory at retailers. The Company does not have access to data on retailer inventories.

Year ended December 31, 2010, as compared to year ended December 31, 2009:

Net Sales

Consolidated net sales were $255.2 million in 2010. This represents a decrease of $15.8 million or 5.8% from 2009 consolidated net sales of $271.0 million.

Firearms segment net sales were $251.7 million in 2010. This represents a decrease of $14.9 million or 5.9% from 2009 firearm net sales of $266.6 million. Firearms unit shipments decreased 2.5% in 2010. A shift in product mix toward firearms with lower unit sales prices resulted in the relatively lower percentage decrease in unit shipments compared to the percentage decrease in sales.

Casting segment net sales were $3.5 million in 2010. This represents a decrease of $0.9 million or 20.1% from 2009 casting sales of $4.4 million.

21

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $171.2 million in 2010. This represents a decrease of $12.2 million or 6.6% from 2009 consolidated cost of products sold of $183.4 million.

The gross margin was 32.9% in 2010. This represents a slight increase from the 2009 gross margin of 32.3% as illustrated below:

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall- In 2010, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall increased as a percentage of sales by 0.1% compared to 2009.

LIFO- Gross inventories were reduced by $2.2 million in 2010 and $8.8 million in 2009. In 2010, the Company recognized a LIFO credit resulting in decreased cost of products sold of $1.0 million. In 2009, the Company recognized a LIFO credit and decreased cost of products sold of $4.2 million.

Overhead Rate Change- The net impact on inventory in 2010 from the change in the overhead rates used to absorb overhead expenses into inventory was an increase of $0.6 million, reflecting decreased overhead efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold in 2010. In 2009, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory was a decrease of $1.3 million, reflecting an

22

improvement in overhead efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold.

Labor Rate Adjustments- In 2010, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was an increase of $0.4 million, reflecting decreased labor efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold. The net impact in 2009 from the change in the labor rates used to absorb labor expenses into inventory was a decrease to inventory of $0.4 million, reflecting an improvement in labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of sales.

Product Liability—The Company’s product liability expense was negligible in 2010, and $1.6 million in 2009. This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. The negligible expense in 2010 reflects favorable experience in product liability matters during the year. See Note 17 to the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Recalls—There were no product recalls initiated in 2010 or 2009. In2008, the Company received a small number of reports from the field that its SR9 pistols, and later, its LCP pistols, could discharge if dropped onto a hard surface. The Company began recalling SR9 pistols in April 2008 and LCP pistols in October 2008 to offer free safety retrofits. The cost of these safety retrofit programs was negligible in 2010 and $0.7 million in 2009. The Company believes that costs incurred for these ongoing retrofit programs will remain negligible in future years.

Gross Profit—Gross profit was $84.0 million or 32.9% of sales in 2010. This is a decrease of $3.6 million from 2009 gross profit of $87.6 million or 32.3% of sales.

Selling, General and Administrative

Selling, general and administrative expenses were $40.2 million in 2010. This represents a decrease of $2.0 million or 5% from 2009 selling, general and administrative expenses of $42.2 million. The decrease reflects decreased personnel-related expenses including stock-based compensation and bonuses.

Other Operating Expenses (Income), net

Other operating expenses (income), net consist of the following (in thousands):

2010

2009

Loss (gain) on sale of operating assets (a)

$

22

$

(45

)

Frozen defined-benefit pension plan expense

398

1,537

Total other operating expenses, net

$

420

$

1,492

(a)

The loss (gain) on sale of operating assets was generated primarily from the sale of used machinery and equipment.

23

Operating Income

Operating income was $43.4 million or 17.0% of sales in 2010. This is a decrease of $0.5 million from 2009 operating income of $43.9 million or 16.2% of sales.

Royalty Income

Royalty income was $0.4 million in 2010. This represents a decrease of $0.1 million from 2009 royalty income of $0.5 million. The decrease is primarily attributable to decreased income from licensing agreements.

Interest Income

Interest income was negligible in 2010, a slight decrease from 2009 interest income of $0.1 million. The decrease is attributable primarily to decreased interest rates in 2010.

Other Income (Expense), Net

Other income (expense), net was $0.4 million in 2010, an increase from a negligible amount in 2009. This income is attributable primarily to the sale of by-products of our manufacturing processes.

Income Taxes and Net Income

The effective income tax rate in 2010 was 36.0%, a decrease from the 2009 effective income tax rate of 38.0%. The decrease in the income tax rate results primarily from an increased benefit from the American Jobs Creation Act of 2004 that was effective January 1, 2010.

As a result of the foregoing factors, consolidated net income was $28.3 million in 2010. This represents an increase of $0.8 million from 2009 consolidated net income of $27.5 million.

24

Quarterly Data

To supplement the summary annual unit data and discussion above, the same data for the last eight quarters follows:

2010

Q4

Q3

Q2

Q1

Units Ordered

241,900

156,500

138,400

305,900

Units Produced

218,300

207,100

238,900

241,900

Units Shipped

236,200

204,200

225,500

237,300

Estimated Units Sold from

Distributors to Retailers

235,200

198,700

213,400

254,200

Average Sales Price

$

264

$

277

$

276

$

279

Units on Backorder

106,800

99,800

147,900

239,900

Units – Company Inventory

23,600

40,600

37,700

24,400

Units – Distributor Inventory (6)

97,700

96,700

91,200

79,100

2009

Q4

Q3

Q2

Q1

Units Ordered (7)

173,000

80,000

204,700

501,000

Units Produced

234,600

242,500

247,300

209,900

Units Shipped

228,500

237,400

246,200

213,700

Estimated Units Sold from

Distributors to Retailers

209,400

214,500

227,500

236,000

Average Sales Price

$

276

$

295

$

286

$

283

Units on Backorder (7)

181,000

240,700

412,300

458,900

Units – Company Inventory

20,100

15,100

9,600

8,800

Units – Distributor Inventory (6)

96,200

76,800

53,900

35,200

(6)

Distributor ending inventory as provided by the independent distributors of the Company’s products.

25

(7)

During the third quarter of 2009, the Company unilaterally cancelled all of the unshipped orders for Mini-14 and Mini Thirty autoloading rifles, and asked the distributors to submit new orders that better represented their forecasted needs. The cancellation of these unshipped orders, partially offset by the submission of new orders for these products, resulted in a net reduction to the backlog of approximately 34,000 units or $20 million. Had these orders not been cancelled, the Units Ordered in the third quarter would have been approximately 114,000 units.

(in millions except average sales price, net of Federal Excise Tax)

2010

Q4

Q3

Q2

Q1

Orders Received

$

63.3

$

45.6

$

38.7

$

81.8

Average Sales Price of Orders Received(9)

$

262

$

291

$

279

$

270

Ending Backlog

$

34.9

$

34.1

$

44.9

$

71.8

Average Sales Price of Ending Backlog(9)

$

326

$

342

$

304

$

299

2009

Q4

Q3

Q2

Q1

Orders Received(8)

$

42.9

$

14.1

$

73.6

$

138.9

Average Sales Price of Orders Received(8)(9)

$

275

$

196

$

400

$

308

Ending Backlog(8)

$

59.6

$

78.0

$

138.0

$

136.3

Average Sales Price of Ending Backlog(8)(9)

$

330

$

324

$

335

$

297

(8)

See description in Note 7 above for information relating to Q3 2009 order cancellations. The cancellation of these orders reduced Orders Received in the third quarter of 2009 by $20 million and decreased the Average Sales Price of Orders Received by $115 per unit. Had these orders not been cancelled, the Average Sales Price of Orders Received would have been $311 per unit. The Average Sales Price of the Ending Backlog was also impacted for the same reasons.

(9)

Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

26

Fourth Quarter Gross Profit Analysis

The gross margin for the fourth quarter of 2010 and 2009 was 32.0% and 33.3%, respectively. Details of the gross profit are illustrated below:

Distributor ending inventory as provided by the independent distributors of the Company’s products.

(2)

Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

28

The increase in orders received in 2008 is attributable to the following:

1.

Increased demand for firearms during the fourth quarter,

2.

New products introduced in 2008, and

3.

Increased production and order fulfillment in 2008.

The product mix of orders received in 2008 shows an increase in demand for firearms related to self defense, including the LCP pistol, which was introduced in the first quarter of 2008.

The decrease in the average sales price of the units in backlog in 2008 is due to the large quantity of new products in the backlog with lower unit sales prices and a reduction in backlog for certain rifle products where production has increased to meet demand.

Orders for certain discontinued models totaling $3.7 million at the end of 2007 were cancelled and have been eliminated from the 2008 backlog information. These orders were included in the backlog for 2007, and their elimination had a significant impact on the change in average sales price of the ending backlog from 2007 to 2008.

The increase in the order backlog is due to the strong incoming order rate for new products and the increase in overall demand that occurred in the fourth quarter.

Production

Production rates, which started to increase late in 2007, continued to improve throughout 2008. This allowed for a 29% increase in unit production from 2007 to 2008.

To supplement the summary annual unit data and discussion above, the same data for the last eight quarters follows:

2009

Q4

Q3

Q2

Q1

Units Ordered

173,000

80,000

204,700

501,000

Units Produced

234,600

242,500

247,300

209,900

Units Shipped

228,500

237,400

246,200

213,700

Average Sales Price

$

276

$

295

$

286

$

283

Units on Backorder

181,000

240,700

412,300

458,900

Units – Company Inventory

20,100

15,100

9,600

8,800

Units – Distributor Inventory (1)

96,200

76,800

53,900

35,200

2008

Q4

Q3

Q2

Q1

Units Ordered

270,400

125,700

120,300

260,100

Units Produced

167,100

158,900

150,600

124,000

Units Shipped

208,100

146,000

136,700

135,700

Average Sales Price

$

275

$

276

$

270

$

296

Units on Backorder

175,900

115,300

137,700

157,100

Units – Company Inventory

12,400

52,600

40,200

24,900

Units – Distributor Inventory (1)

57,500

65,800

62,900

61,800

(1)

Distributor ending inventory as provided by the independent distributors of the Company’s products.

30

Orders Received and Ending Backlog

(in millions except average sales price, net of Federal Excise Tax)

2009

Q4

Q3

Q2

Q1

Orders Received

$

42.9

$

14.1

$

73.6

$

138.9

Average Sales Price of Orders Received

$

275

$

196

$

400

$

308

Ending Backlog

$

59.6

$

78.0

$

138.0

$

136.3

Average Sales Price of Ending Backlog

$

330

$

324

$

335

$

297

2008

Q4

Q3

Q2

Q1

Orders Received

$

78.3

$

33.5

$

33.7

$

67.0

Average Sales Price of Orders Received

$

290

$

267

$

280

$

258

Ending Backlog

$

47.8

$

27.9

$

33.7

$

40.7

Average Sales Price of Ending Backlog

$

269

$

242

$

245

$

234

Note:

Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

Net Sales

Consolidated net sales were $271.0 million in 2009. This represents an increase of $89.5 million or 49.3% from 2008 consolidated net sales of $181.5 million.

Firearms segment net sales were $266.6 million in 2009. This represents an increase of $92.2 million or 52.8% from 2008 firearm net sales of $174.4 million. Firearms unit shipments increased 47.8% in 2009 due to increased shipments of pistols, rifles and revolvers. This increase is attributable to the introduction of new products in 2009, increased production of mature products, and increased overall industry demand. A shift in product mix toward firearms with higher unit sales prices, including some new products, resulted in the relatively lower percentage increase in unit shipments compared to the percentage increase in sales.

Casting segment net sales were $4.4 million in 2009. This represents a decrease of $2.7 million or 37.5% from 2008 casting sales of $7.1 million.

31

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $183.4 million in 2009. This represents an increase of $44.7 million or 32.2% from 2008 consolidated cost of products sold of $138.7 million.

The gross margin was 32.3% in 2009. This represents an increase from the 2008 gross margin of 23.6% as illustrated below:

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall- In 2009, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall decreased as a percentage of sales by 7.3% compared to 2008. The decrease was primarily related to increased comparable period sales and production while holding fixed-overhead expenses fairly stable. Labor efficiency also improved in 2009.

LIFO- Gross inventories were reduced by $8.8 million in 2009 and $4.5 million in 2008. In 2009, the Company recognized a LIFO credit resulting in decreased cost of products sold of $4.2 million. In 2008, the Company recognized a LIFO charge and increased cost of products sold of $0.8 million.

Overhead Rate Change- The net impact on inventory in 2009 from the change in the overhead rates used to absorb overhead expenses into inventory was a decrease of $1.3 million, reflecting improvement in overhead efficiency. This decrease in inventory value resulted in a corresponding increase to cost of sales in 2009. In 2008, the change in inventory value resulting from the change in the overhead rate

32

used to absorb overhead expenses into inventory was an increase of $1.4 million. This increase in inventory value resulted in a corresponding decrease to cost of products sold.

Labor Rate Adjustments- In 2009, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.4 million, reflecting improvement in labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold. The net impact in 2008 from the change in the labor rates used to absorb labor expenses into inventory was an increase to inventory of $1.3 million. This increase in inventory value resulted in a corresponding decrease to cost of sales.

Product Liability—In 2009 and 2008, the Company incurred product liability expense of $1.6 million and $0.9 million, respectively, which includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. See Note 17 to the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Recalls—There were no product recalls initiated in 2009. In2008, the Company received a small number of reports from the field that its SR9 pistols, and later, its LCP pistols, could discharge if dropped onto a hard surface. The Company began recalling SR9 pistols in April 2008 and LCP pistols in October 2008 to offer free safety retrofits. The cost of these safety retrofit programs totaled $0.7 million and $3.5 million in 2009 and 2008, respectively.

Gross Profit—Gross profit was $87.6 million or 32.3% of sales in 2009. This is an increase of $44.8 million or 105% from 2008 gross profit of $42.8 million or 23.6% of sales.

Selling, General and Administrative

Selling, general and administrative expenses were $42.5 million in 2009. This represents an increase of $12.4 million or 41.1% from 2008 selling, general and administrative expenses of $30.1 million. The increase reflects increased advertising and sales promotion expenses and greater personnel-related expenses including stock-based compensation and bonuses.

Other Operating Expenses (Income), net

Other operating expenses (income), net consist of the following (in thousands):

2009

2008

Gain on sale of operating assets (a)

$

(45

)

$

(95

)

Frozen defined-benefit pension plan expense (income)

1,537

(745

)

Total other operating expenses (income), net

$

1,492

$

(840

)

(a)

The gain on sale of operating assets was generated primarily from the sale of used machinery and equipment.

33

Operating Income

Operating Income was $43.9 million or 16.2% of sales in 2009. This is a 224% increase of $30.4 million from 2008 operating income of $13.5 million or 7.5% of sales.

Royalty Income

Royalty income was $0.5 million in 2009. This represents an increase of $0.4 million from 2008 royalty income of $0.1 million. The increase is primarily attributable to increased income from licensing agreements.

Interest Income

Interest income was $0.1 million in 2009. This represents a decrease of $0.3 million from 2008 interest income of $0.4 million. The decrease is attributable primarily to decreased interest rates in 2009.

Income Taxes and Net Income

The effective income tax rate in 2009 was 38.0%, which is consistent with the 2008 effective income tax rate of 38.0%.

As a result of the foregoing factors, consolidated net income was $27.5 million in 2009. This represents an increase of $18.8 million from 2008 consolidated net income of $8.7 million.

Financial Condition

Liquidity

At December 31, 2010, the Company had cash, cash equivalents and short-term investments of $57.6 million. The Company’s pre-LIFO working capital of $109.3 million, less the LIFO reserve of $37.4 million, resulted in working capital of $71.9 million and a current ratio of 3.2 to 1.

The Company expects to replenish its finished goods inventory to levels that will better serve our customers. This replenishment could increase the FIFO value of finished goods inventory by as much as $12 to $15 million from current depressed levels. We anticipate that the cash required to fund this increase in finished goods inventory would be partially offset by a reduction in accounts receivable which would be expected during a period of reduced demand.

During the first quarter of 2009, the Company paid down the $1 million balance on its $25 million credit facility, in response to the relative improvement in the global financial and credit markets. The credit facility, which expires on December 12, 2011, remains unused and the Company has no debt.

Operations

Cash provided by operating activities was $32.5 million, $46.7 million, and $11.2 million in 2010, 2009, and 2008, respectively. The decrease in cash provided in 2010 compared to 2009 is attributable to the large reduction in inventory and the increase in employee benefits and compensation in 2009 and the increase in accounts receivable in 2010. This increase in accounts receivable resulted from unusually strong sales in December of 2010 in advance of the distributor show season, which occurs during the first quarter. No extension of payment terms was made for any of these sales. The increase in cash provided in 2009 compared to 2008 is principally attributable to increased profitability in 2009 and a slight decrease in accounts receivable 2009.

34

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide ample time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials can not be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

Investing and Financing

Capital expenditures were $19.4 million, $13.8 million, and $9.5 million in 2010, 2009, and 2008, respectively. In 2011, the Company expects to spend approximately $15 million on capital expenditures to purchase tooling for new product introductions and to upgrade and modernize manufacturing equipment and information technology infrastructure. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and short-term investments.

During the past several years, the Board of Directors authorized the Company to repurchase shares of its common stock. In 2010, the Company repurchased approximately 412,000 shares of its common stock under a 10b5-1 program, representing 2.1% of the then outstanding shares, in the open market at an average price of $13.83 per share. In 2009, the Company repurchased approximately 2,400 shares of its common stock under a 10b5-1 program, representing 0.01% of the then outstanding shares, in the open market at an average price of $6.03 per share. In 2008, the Company repurchased 1,535,000 shares of its common stock, representing 7.5% of the then outstanding shares, in the open market at an average price of $6.57 per share. All of these purchases were made with cash held by the Company and no debt was incurred.

At December 31, 2010, $10.0 million remained authorized for share repurchases.

The Company paid dividends totaling $6.3 million and $5.8 million in 2010 and 2009, respectively. There were no dividends paid in 2008.

On February 15, 2011, the Company declared a dividend of 5.0¢ per share to shareholders of record on March 11, 2011. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company’s need for funds.

The Company has migrated its retirement benefits from defined-benefit pension plans to defined-contribution retirement plans, utilizing its current 401(k) plan.

In 2007, the Company amended its hourly and salaried defined-benefit pension plans so that employees no longer accrue benefits under them effective December 31, 2007. This action “froze” the benefits for all employees and prevented future hires from joining the plans, effective December 31, 2007. Currently, the Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

35

Minimum cash contributions of $1.7 million were required for the defined-benefit plans for 2010. The Company contributed $2 million to the defined-benefit plans in both 2010 and 2009.

In future years, the Company may again be required to make cash contributions to the two defined-benefit pension plans. The annual contributions will be based on the amount of the unfunded plan liabilities derived from the frozen benefits and will not include liabilities for any future accrued benefits for any new or existing participants. The total amount of these future cash contributions will depend on the investment returns generated by the plans’ assets and the then-applicable discount rates used to calculate the plans’ liabilities.

The Company plans to contribute approximately $2 million in 2011, but will increase the amount of the contribution if required to do so. The intent of these contributions is to reduce the amount of time that the Company will be required to continue to operate the frozen plans. The ongoing cost of running the plans (even if frozen) is approximately $200,000 per year, which includes PBGC premiums, actuary and audit fees, and other expenses.

In the first quarter of 2009, the Company settled $2.1 million of pension liabilities through the purchase of group annuities. This transaction resulted in an insignificant actuarial gain.

In February 2008, the Company made lump sum benefit payments to two participants in its only non-qualified defined-benefit plan, the Supplemental Executive Retirement Plan. These payments, which totaled $2.1 million, represented the actuarial present value of the participants’ accrued benefit as of the date of payment. Only one, retired participant remains in this plan.

Based on its unencumbered assets, the Company believes it has the ability to raise substantial amounts of cash through issuance of short-term or long-term debt. The Company’s unsecured $25 million credit facility, which expires on December 12, 2011, remains unused and the Company has no debt.

Contractual Obligations

The table below summarizes the Company’s significant contractual obligations at December 31, 2010, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods. This table excludes amounts already recorded on the Company’s balance sheet as current liabilities at December 31, 2010.

“Purchase Obligations” as used in the below table includes all agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Certain of the Company’s purchase orders or contracts for the purchase of raw materials and other goods and services that may not necessarily be enforceable or legally binding on the Company, are also included in “Purchase Obligations” in the table. Certain of the Company’s purchase orders or contracts therefore included in the table may represent authorizations to purchase rather than legally binding agreements. The Company expects to fund all of these commitments with cash flows from operations and current cash and short-terms investments.